What is the impact on the market-to-book ratio

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According to many analysts, BeforePay Pty LTd is a star of the ASX. Its current market price is $15 per share and its book value is $5 per share. Analysts forecast that the firm's book value will grow by 10% per year indefinitely and the cost of equity is 15%.

Question i) Given these facts, what is the market's expectation of the firm's long-term average ROE?

Question ii) Given the information in question (i) what will be BeforePay's share price if the market revises its expectations of long-term average ROE to 20%?

Question iii) Analysts reassess BeforePay's future performance as follows: growth in book value increases to 12% per year, but the ROE of the incremental book value is only 15%. What is the impact on the market-to-book ratio?

Reference no: EM132573035

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